Failed deal, red ink, dwindling sales put MassRoots on the ropes

At one point, MassRoots was flying high, raising millions of dollars from investors and attempting to become the first cannabis company listed on the Nasdaq.

Over the course of 2017, however, the marijuana-centric social media network has nosedived and now finds itself in a precarious position.

Consider the following recent developments:

  • Last month, the company’s board of directors abruptly fired CEO and founder Isaac Dietrich for undisclosed reasons.
  • A much-heralded $12 million stock deal to acquire the tech firm CannaRegs was scrapped just after Dietrich’s ouster.
  • MassRoots saw its net loss for the first six months of the year skyrocket nearly fivefold from the same period a year earlier to hit $19.1 million, with much of that tied to a massive increase in stock-based compensation. Its revenues also tumbled by more than 50% during the first half of the year, coming in at $277,614.
  • MassRoots’ stock, which trades on the over-the-counter markets under the ticker symbol MSRT, is down 80% this year.
  • The company has downsized its staff by at least two-thirds, with only a handful of full-time employees left.
  • It has burned through hundreds of thousands of dollars in cash this year. MassRoots had just $31,247 in cash as of June 30, down from $374,490 at the end of 2016, according to the last financial statement MassRoots filed with the Securities and Exchange Commission.
  • MassRoots has acknowledged it needs to scrape together additional money. In May, the company disclosed in its quarterly financial filing that it had to raise $5 million “to continue to fund operations.” It’s unclear if MassRoots has been able to reach that target.

All of that and more are now in the lap of Scott Kveton, who took over as MassRoots’ CEO last month.

“(Kveton has) got his work cut out for him, because he has to look at how he’s going to improve operations as well as figure out ways to find other sources of funding,” said Matt Karnes, the founder of New York-based GreenWave Advisors.

“What they have to do is go back to their existing investors and maybe ask them to double down on their investments,” he added. “I don’t know how well that would be received. And how difficult it’s going to be, with all this going on, to attract a new investor pool.”

Karnes offered this conclusion: “It’s like being on the Titanic and not being sure what leak to plug first.”

Stock dropping

The company’s shares closed Wednesday at a 52-week low of 21 cents, a drop of 4% for the day. Its stock was $1.03 at the end of 2016.

In an interview, Kveton acknowledged the company “has definitely trimmed down.”

“We’ve definitely had a contraction from earlier this year,” he told Marijuana Business Daily. “It was ultimately just right-sizing the business. That’s been going on since long before I joined the company (in July).”

Looking ahead, he added: “Ultimately, at the end of the day, we’re focused on building the company.”

However, he declined to discuss the company’s financial situation, and in the eyes of some close observers, MassRoots appears to be in serious trouble.

“Personally, I’m afraid for MassRoots,” said Dustin Carter, a former sales executive at the company who left to work at Denver-based CannaRegs after Dietrich’s ouster.

Carter said four other former MassRoots employees have also found a home at CannaRegs, which provides services that help marijuana companies stay on top of ever-changing industry regulations.

While CannaRegs has been on an apparent hiring spree, there’s been no announcement of MassRoots bringing on new employees since the change in company leadership.

Carter said that before leaving MassRoots last month he had an “amicable” conversation with Kveton.

“He said to me, ‘You’ve been a kick-ass employee … but there’s nothing to sell at MassRoots currently,'” Carter said. “There wasn’t much for everyone to do. There wasn’t much to build. There wasn’t much to sell.”

In an interview Wednesday, former CEO Dietrich – who’s also on the four-member board of the directors and still holds that position today – said the planned acquisition of CannaRegs was instrumental to the future of MassRoots and would have provided a significant boost to the firm’s revenues.

He claims that his fellow board members helped sink the acquisition, though CannaRegs’ CEO Amanda Ostrowitz previously said she was the one pulled the plug on the deal shortly after Dietrich was forced out.

“Had that acquisition gone through, it would have been extremely beneficial … for MassRoots’ shareholders and given us significant exposure to the California market,” Dietrich said.

He also said that MassRoots raised $2 million in the third quarter of 2017 while he was still CEO, but he’s still concerned about the company’s future.

MassRoots declined to comment on Dietrich’s claims. However, some observers were critical of the CannaRegs deal, saying the purchase price was grossly inflated.

Dwindling head count

Carter, who said he visited the MassRoots office Wednesday, put the company’s current full-time employee head count at four, including Kveton.

Kveton declined to specify the number of full-time employees. He did estimate that MassRoots now has around 10 employees.

That’s down from at least 31, according to Yahoo Finance.

Dietrich said the company had 35 full-time employees at its peak but was down to 12 in October before his ouster.

“We had been reducing our employee count throughout the year to reduce the amount of money we were spending,” Dietrich said.

“We were spending a considerable amount of money scaling our platform and developing new features. It was operational costs.”

MassRoots also appears to have scaled back on expenses such as business conferences.

At a cannabis event in London last month, for instance, the company had a booth, but it appeared no one actually attended the conference to staff it.

More trouble looming?

Next week may shed some more light on MassRoots’ financial situation.

Kveton wrote in an email to Marijuana Business Daily that the company’s third-quarter financial filing – with details of the company’s finances – is due to the SEC at that point.

Dietrich indicated to Marijuana Business Daily last week that more turmoil is in store for the company.

He said he’s planning to call a shareholder vote “in the very near future” to try to remove the other three board members, who fired him as CEO.

“I don’t know exactly what the next steps are, but I do know that the board’s days are limited,” Dietrich said.

“And quite frankly, they have stolen this company from the shareholders, and that is a very dangerous position for the board to be in.”

MassRoots officials didn’t comment on Dietrich’s plans.

John Schroyer can be reached at [email protected]

12 comments on “Failed deal, red ink, dwindling sales put MassRoots on the ropes
  1. Clint Leeds on

    Considering Dietrich was at the helm during the cash spending spree, shouldn’t he be to blame? From my research the kid never ran a successful business in his life and If you Google his name you can see he started a dating app for the LGBT community this summer which seems to be a bit odd considering the state of the business. A friend of mine was a former employee and concurred that Dietrich was to blame for the problems at the Company. Said he spent more time raising and spending money rather than running the Company.

    How could any shareholder or Board trust this kid when the public financials are so pathetic? Blame should be pointed at him based on the continuing failed business model, lack of revenue and apparent misuse of shareholders funds. He mentions that money was spent on developement of technology? What technology?

    CannaReg Deal makes no sense. $12M for a company that alleges it does $500K in revenue? Great deal for CannaRegs and would of been the death of MassRoots!

    Reply
    • Adam on

      To play devil’s advocate:

      Is it possible the board sees the ship sinking and just wants the money? If a majority of their losses are in stock compensation, couldn’t that be because the board members won’t give up stock to risk growth?

      It’s odd to me that a kid who just wants to “spend money rather than run the company” would be upset he was ousted at the lowest point and wants to fight his way back in where there is no money to spend. That sounds more like passion than greed. On the other hand, a board of members that want to squeeze every dime out of a sinking ship would not want to make a sizeable purchase of another company, overpriced or not (if overpriced, wouldn’t they try to negotiate rather than sink the deal?).

      Reply
      • Dustin on

        Well, if a kid was spending millions of dollars of investor’s money, wouldn’t he be upset when the piggy bank got taken away from him and he had to go back to making money honestly and didn’t have access to a corporate credit card?

        Reply
      • Clint Leeds on

        To play a realist:

        What money???? They were probably given stock and options that are worth nothing for taking the liability of this reckless kid? Growth??? They gave this borderline crook $17M+ of runway to build a business and he did NOTHING. This fraud should of been canned years ago!

        He brought ZERO value to shareholders as depicted by the stock price and they would be insane to ever let this clown back into the Company. Cannaregs is not worth $5M and common sense and proper valuation probably surfaced rather than overpay simply for a news announcement as part of his history of implementing a Smoke and Mirrors strategy. How did the Whaxy deal turnout? Another blunder by this clown.

        Reply
  2. Jake Newman on

    If the old CEO stated he raised $2M in Q3 and they had a lean staff, where did all the money go? Sounds like the old CEO has some explaining to do.

    Reply
    • Lucas Woodman on

      Stock down 80% YTD, Dietrich burned through millions of dollars, company failed to develop a successful business model for years, how does this scorned ex-CEO think that he can push the blame elsewhere? Has he ever heard of the word “accountability”?

      I imagine this new guy must have a plan to clean up the the “Titantic” that was run into the iceberg by Dietrich and his old crew of misfits. I met their old Director of IR in NY and I thought he was a cab driver. He had no clue what he was talking about.

      Reply
      • Adam on

        To play devil’s advocate:

        “MassRoots saw its net loss for the first six months of the year skyrocket nearly fivefold from the same period a year earlier to hit $19.1 million, with much of that tied to a massive increase in stock-based compensation.”

        Is it possible the board sees the ship sinking and just wants the money? If a majority of their losses are in stock compensation, couldn’t that be because the board members won’t give up stock bonuses to risk growth?

        Reply
  3. Rob Meagher on

    CBE Press has watched MassRoots from day one and could never get our arms around the premise of a social network for alcoholics, the original consumer thrust of the company’s positioning. We politely avoided covering them and the myriad of press releases over the last two years for that simple reason.

    In order for the original social network for cannabis consumers strategy to be successful, they would have had to accumulate a huge percentage of audience from the estimated 40 million plus cannabis consumers in America, many of whom in their target center were young stoners who bought from the black market before legalization in many states…and probably after as well.

    With the variety of demographic groups that are buying cannabis at legally regulated stores, to reach them represented an overwhelming and significant spend to generate the kind of audience, let’s say 15-20% of all cannabis consumers domestically, that would mirror what Madison Avenue got from old world pubs like The Readers Digest, Modern Maturity or Parade who reached that many and more of all US Adults at their peak. (and ultimately saw dwindle with the advent of the internet, the demise of newspaper readership etc.)

    As MassRoots spending increased to drive audience and acquisition of what we saw as a shift to more of a B to B media play, it appeared to us that the original strategy was indeed flawed and they began to morph towards a b to b portal and data play. In our eyes, the non-stop hysterical promotional efforts by Dietrich and his inexperienced college buds (We will be the first Nasdaq listed cannabis stock….to would of, should of, could of…) was another tell tale sign of impending disaster and a lack of solid business acumen in the media space or tech space that, for the life of us, CBE couldn’t understand the amount of dough that kept flowing their way and out the door as quickly as it came in. We kept watching for revenue generation (as did their investors we are sure) that never occurred.

    The CannaRegs purchase announcement struck CBE as irresponsible (we knew CannaRegs revenues that were reported because we considered including them in our annual Ancillary Business list) and decided not to after the MassRoots agreement was announced. We thought that the price payed was out and out excessive and irresponsible…and another indication of a flawed strategy that continued to morph, in the wrong direction.

    The comments in the story (“I don’t know exactly what the next steps are, but I do know that the board’s days are limited,” Dietrich said.) seem to be a desperate act and Dietrich’s latest PR play to oust and blame the board (and everyone is accountable here!) and are indicative of a petulant child who isn’t getting his way and is striking out in all directions knowing that the walls are closing in. We believe that it will not end well for all involved and from a human perspective wish everyone well.

    We appreciate MJ Biz Daily’s coverage of this MassRoots story and as always stress that due diligence be done not only on the strategy and the market the strategist is targeting but on the basic human element, experience, maturity, knowledge of those markets by the management team etc. by the entire investment community.

    Chalk this one up to what we’ve all seen before, most recently with the internet boom and bust, there will be many others as the green rush turns to the green mush for the vast majority of not well thought out business plans & strategies that lack the experience and knowledge to build a strong foundation based on good old business basics and fundementals.

    Reply
    • Clint Leeds on

      Excellent commentary Rob. Very well done and could not agree more. I sincerely hope the company has the ability to work through the damage caused by Dietrich and provides you a chance to talk about how this company did a successful turnaround.

      Reply
  4. Brett Roper on

    I would focus on forgetting about the blame game and more on what is our plan to the creation of a path to profitability … The Board as well as Isaac owe their shareholders that much and it appears to me there is always enough blame to go around so get the ship righted or find the right team to restore it if possible. I have hopes MSRT will come through this most violent of storms.

    Reply
  5. Rick Fague on

    I can relate, we’re also a tech startup with a legal MJ vertical. What’s happened with MassRoots reminds me of the dotcom bust, when tech startups everywhere experienced growing pains, many severe enough to be fatal.

    We’ll probably see a few more stories like this one as the industry matures but maturation will bring in more experienced CEO’s, CFO’s, COO’s and senior management pros from more traditional industries who can guide startups through turbulent times by making better decisions at critical points.

    Dietrich probably thought acquiring MassRegs would be the Hail Mary play that would save the day but if so, he didn’t execute it properly as far as I can tell.

    Reply

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